Investing for College: A Step-By-Step Guide:
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Over the past decade, the cost of a college education has been escalating at a rate exceeding that of inflation. With this in mind, it's important to ask yourself now how you'll be able to finance a college education for your child or grandchild in the future.
Whether your child is 6 or 16, the important thing is to begin planning today. Educating yourself on the costs of college is the first step in enabling you to set specific goals for your college plan. A virtual library of information is available on the web where you can find information about college costs, saving for college, financial aid and scholarships. The following websites are helpful college planning resources:
www.collegeboard.com
www.ed.gov
www.salliemae.com
Don't let the costs of a college education scare you. Many things can help to reduce the cost of college and make your goal more achievable. College is a long-term investment and most families pay for college through a combination of savings, current income and loans. Many families also apply for financial aid and grants to help with college tuition and expenses. In addition, if your child or grandchild has an outstanding academic or athletic record, researching scholarships is worthwhile. You should also consider how much, if any, the student will have to contribute. If you expect your child's contribution to be significant, it is important to teach him or her to begin saving early.
Now consider how much you plan to contribute to your child's college expenses. You'll also need to consider how long you have to invest before your child enters college and whether he or she is likely to attend a public or a private university.
Planning early can help ease your financial burden. The more you save and put away in a college fund, the less you'll need to borrow or take from current income.
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Now that you have determined your college fund goal, it's time to take action and develop a college fund strategy. It wasn't too long ago that parents could set aside enough money in a savings account to see a child comfortably through four years of college.
Times have definitely changed. That's why many financial experts believe that investing for your child's college education is a wiser choice. Investing does involve greater risk, but that goes hand-in-hand with the potential for greater returns over time.
When you plan in advance and start investing early, you can benefit from the power of compounding. What this means is that once you establish a foundation for your investment, you can help it grow by reinvesting any interest, dividends and capital gains your mutual funds pay you, right back into the market. In a rising market, compounding in this way may produce dramatic results over time, so the sooner you begin investing, the more time you'll have to take advantage of the power of compounding.
Mutual funds are probably the simplest and most convenient way for most people to begin investing. Mutual funds offer a number of benefits, the most important being that they are run by professionals who devote their time to studying the market and individual investments. In addition, mutual funds can help to diversify your assets with one easy step and typically have an affordable minimum investment requirement.
If your child is very young you may want to consider investing aggressively, by focusing on growth-oriented stock funds, for example. These investments do involve a higher degree of risk, but they also offer the greatest long-term growth potential. Even if your child is older, it's still not too late to plan. You'll probably want to invest somewhat more conservatively as college nears, then gradually place more emphasis on preserving capital so you'll be ready when tuition bills come due.
The MTB Group of Funds offers a comprehensive range of money market, bond and stock portfolios designed to meet both short and long-term needs. Whether you're looking to enhance short-term income, gain tax advantages or achieve long-term growth, MTB Funds offers a variety of mutual fund solutions.
 
You don't have to make a large lump sum investment to get a college plan underway. In fact, regular investing through a strategy called dollar-cost averaging can help keep you on track to your goal. The principle is simple: invest the same amount of money each month or quarter, no matter what the market is doing.
By investing a fixed dollar amount on a regular basis, you will buy more shares when the market is declining and fewer shares when it's heading up. In other words, your average price per share may be lower than the market average over that period. Although dollar-cost averaging can be a very effective way to build your portfolio over time, you should be aware that it doesn't ensure a profit nor prevent a loss in declining markets. You should also take a close look at your financial resources and assess whether you'll be able to contribute to your child's college account on a regular basis. Because dollar-cost averaging involves continuous investment regardless of fluctuating price levels, investors should consider their financial ability to continue purchases during periods of low price levels. If you can manage to apply dollar-cost averaging to even a small amount of money, consider doing so as the long-term results can be very rewarding. |
Uniform Transfer/Gift to Minors Act Account
A UTMA/UGMA is a custodial account set up in your child's name. This provides a terrific way for you to save money for your child without potentially incurring a huge sum in taxes. Any money you contribute to an UTMA/UGMA is, by law, an irrevocable gift to your child. Generally, most if not all of the income earned on the account will be taxed at a lower rate than your own.
In addition, each parent or grandparent can contribute up to $12,000 to a child's account per year without having to pay any federal gift tax.
The child can assume complete control over the funds when the child reaches the age of trust termination (18 or 21, depending on the state and whether the account is a UGMA or UTMA account). This means that the money can be used for education expenses or anything else the child chooses. Neither the custodian nor the donor can legally place any conditions on the use of those funds once the UGMA or UTMA terminates.
Consult your tax advisor for more information about taxation of UTMA/UGMA accounts and how they may fit into your investment plan.
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Penalty Free Withdrawals from Traditional and Roth IRAs for Education Expenses
It's never been easier for parents and grandparents to invest for their children or grandchildren's college education. You can withdraw money from your Traditional or Roth IRA each year without a Federal tax penalty to finance qualified higher education expenses for you or your immediate family.* The beauty of this for you is that your money can grow tax deferred, unhampered by taxes until you need it.
Coverdell Education Savings Account:
Parents and grandparents who qualify under certain adjusted gross income ceilings can contribute to a Coverdell Education Savings Account. Distributions from these accounts for the designated beneficiary's qualified higher education expenses (and qualified elementary and secondary expenses) are exempt from Federal income tax.**
529 Plans:
These state-sponsored tuition programs offer parents and other taxpayers a tax-favored means of funding a child's future higher education expenses.*** With most 529 plans anyone can establish an account regardless of income level or beneficiary's age.
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